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Sep 25, 2014

Last chance to avoid unclaimed property audit in Delaware

VDA program is intended to encourage voluntary compliance rather than forcing it through an audit

When it comes to compliance, filing annual unclaimed property reports with the state in which they’re incorporated is often something companies let slip through the cracks. But as states – and contract auditors, which have lots to gain when unused gift cards, unreturned downpayments and uncashed dividend checks are escheated to states – get more aggressive about targeting such companies for audits, non-compliant firms could incur major costs.

Companies incorporated in Delaware have the rare opportunity to avert an audit by enrolling in the state’s voluntary disclosure agreement (VDA) program, which Corporate Secretary first reported on in our April 2014 issue. With less than one week to go until the extended deadline of September 30, slightly more than 600 of the more than 1,000 companies that have been targeted for audits have enrolled so far. Confirmation of enrollment precludes Delaware from subjecting companies to an audit, which could stretch back as far as 1981, and waives any interest, penalties or other costs associated with non-compliance.

‘It’s sort of like a get-out-of-jail-free card,’ says Valerie Jundt, managing director in consulting and advisory services at Keane, a leading unclaimed property consultant. ‘It makes sense to go through it because if you’re incorporated in Delaware at some point you will likely get selected for an audit. This helps you manage your own audit and reaffirm that what you’re doing is correct.’

Under the VDA, companies are required to check their books and records and any transaction files related to mergers and acquisitions, as far back as 1993, to calculate how much in unclaimed property they owe the state. Companies will have until June 30, 2016 to either make payment or establish a payment plan with the state. For companies that don’t have records extending back to 1993, Keane helps create an estimate based on assumptions of more current periods.

According to Geoff Sawyer, a partner at Drinker Biddle & Reath, the law firm to which administration of the VDA program was outsourced via a request for proposal in August 2012, just 10 percent of the roughly 1 million legal entities incorporated in Delaware file unclaimed property reports. That’s a bigger portion than it seems at first as some companies with many subsidiaries choose to file on a consolidated basis for all their entities, he explains.

‘Still, compliance could be better,’ says Sawyer. A larger portion of the 600 enrollees than one might imagine have never filed in Delaware or anywhere else, he points out, adding that the program’s aim is voluntary compliance rather than forcing compliance through an audit.

By assigning VDAs to the Secretary of State’s office instead of the State Escheator in the Department of Revenue, where audits are handled, Delaware wants to signal to companies how serious it is about compliance, says Sawyer. The state doesn’t have a projected dollar amount for what may be remitted as a result of the program, but Sawyer says Delaware received $74 million in unclaimed property as a result of 81 VDAs resolved in the last fiscal year.

Companies that haven’t enrolled may think they’re already in compliance or may have concerns about the resources and time commitment the VDA will require. ‘It’s going to be much more difficult to defend yourself in an audit than to go through this program,’ Jundt warns. The reach-back period is an additional 13 years, penalties and interest won’t be waived ‘and you don’t control the process; you’re responding to the audit.’